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Forests provide carbon sinks to remove CO2 from the atmosphere. Campbell Global has developed an investment process to evaluate how forest carbon stores may lead to business decisions that can improve carbon sequestration.


Overview

This case study from Campbell Global originally appeared in the CFA Institute report "Climate Change Analysis in the Investment Process."

Introduction

Campbell Global (CG), a global investment manager focused on forest and natural resources investments, has nearly four decades of experience in sustainable value creation. As a firm, we are committed to managing our forests in a manner that promotes the best long-term interests of our clients, while also striving to address both economic and ESG considerations.

In addition to their economic value, forests, both natural and commercial, generally serve as vast carbon sinks as trees remove CO2 from the atmosphere and use it as building blocks to increase growth and carbon storage. As shown in Figure 1, in one year, a single Douglas-fir tree (a common commercial timber species in the Pacific Northwest) stores the CO2 equivalent of driving 400 miles in a standard automobile.1 Globally, it is estimated that the earth’s forests absorb as much as 30% of human-induced CO2 emissions.2

Figure 1. Example of Annual CO2 Sequestration and Emissions Equivalent

CO2 sequestered by one douglas-fir tree equals CO2 emissions by driving 400 miles in a standard automobile

Source: Emissions calculated using the equivalency calculator, available at https://www.epa.gov/energy/greenhouse-gas-equivalencies-calculator.

Sustainably harvested wood products and materials also store atmospheric CO2 long after they have been removed from a forest, with one cubic meter of wood capable of storing nearly a metric ton of CO2.3 In addition to carbon sequestration, forests provide other benefits, including clean water and wildlife habitat, recreational opportunities, and a source of living-wage jobs in rural communities. These attributes positively align with the UN’s Sustainable Development Goals and contribute to advancing its mission for a sustainable future for all. For all of these reasons, well-managed forests are a critical component of any global climate change strategy.

At CG, climate-related risks and opportunities are factored holistically into the investment process. We begin by identifying which geographies to include in our investable universe.4 Scenario analyses allow us to identify climate-related risks beginning at a broad country-level scale, then narrowing down to a specific property, and finally testing the impact of various risks to site suitability now and into the future. To gauge climate risks, we include analysis of precipitation patterns, temperature fluctuations, the severity of weather events, presence of pests or disease, and the annual average growth rates for commercial tree species.

Although many climate-related risks in forestry are mitigated through active management, during this iterative process we analyze both the potential positive and negative impacts associated with these risks, allowing us to assess potential changes in net asset value. Table 1 illustrates climate risks evaluated, their impact on the forest, and what a company can do to mitigate the risks through the investment and active management process.

Table 1. Climate Risks, Implications, and Company/Investment Strategies for Mitigation

Climate Risk

Implication

Mitigants

Change in temperature

Increased fire danger

Property-specific fire plans; re-evaluate target regions/country for investment

 

 

 

Change in precipitation patterns

Changes in tree species range; increased drought and related fire risk

Vegetation suitability modeling and genetic tree improvement; re-evaluate target regions/country for investment

 

 

 

Frequency of stochastic weather events

Loss of standing timber from wind events

Re-evaluate target regions; property-specific response plans; geographically diverse portfolio construction

 

 

 

Presence of pests or disease

Early onset and increased frequency of individual tree mortality

If feasible and not detrimental to investment value, plan to treat immediately. Otherwise, pass on the opportunity. If current investment, immediate treatment, which may include removal of affected trees to prevent further spread of pests or disease in the forest

 

 

 

Change in growth

Increased or decreased growth rates

Effects will vary by region, may influence planting stock decisions; re-evaluate forest growth model assumptions

At a country-level scale, the analysis may lead us to avoid investing in certain regions where the risk of extreme climatic events is too high. For example, we have excluded specific regions within the United States and Australia from our investable universe because of intensifying drought conditions, which increase the risk of both disease and fire within a forest. Similarly, following the 2017 fires in Chile, we revised our investment strategy to exclude specific regions within the country that face elevated risk of future forest fires. Because the science is evolving, combined with the increasing frequency of landscape-level disturbances, we routinely test our assumptions and re-evaluate our views on risk-adjusted investment strategies.

After identifying investment regions and incorporating them into an investment strategy, we follow a due diligence process to identify both challenges and opportunities related to climate change. This process enables us to mitigate risks and attempt to increase both the ecological and financial value of the forest for our investors. Furthermore, governance through our investment committee policies and procedures enables us to be flexible and opportunistic, allowing us to adapt quickly as new information develops in response to the evolving nature of climate change science and related public policy developments.

Here are some specific examples of how we have identified climate change–related opportunities and challenges in the investment process:

  • Developing of pilot projects to evaluate the monetization of carbon offset credits through our strategic alliance with Bluesource, a leader in environmental markets;
  • Identifying afforestation opportunities that mitigate climate change by sequestering CO2 from the atmosphere into trees and soil, which also offers many important benefits for communities, biodiversity, and soil and water quality;
  • Quantifying our carbon footprint and managing transition risks by minimizing CO2 emissions associated with forest management and manufacturing activities;
  • Protecting existing carbon stocks by minimizing the effects on carbon stored on the forest floor through tailored forest management practices;
  • Enhancing forest carbon sequestration by replanting areas as soon as possible so the new forest will quickly begin removing CO2 from the atmosphere;
  • Certification and compliance with third-party, verified sustainable forest management standards;
  • Participating in academic cooperatives to stay abreast of new research findings; and
  • Minimizing potential emissions and losses from forest fires by developing property-specific fire plans and engaging directly with local first responders to prepare for emergency events.

Climate Accounting — For Dollars and Sense

As an early entrant into the regulated carbon trading markets with our McCloud River Carbon Project in Northern California, we positioned our client to monetize the additional carbon stored on an existing conservation easement. From 2007 to 2014, the carbon project created more than 260,000 metric tons of compliance-grade carbon offsets—the equivalent of the annual emissions from 56,000 cars. Recently, we verified an additional 184,000 metric tons of carbon offsets that were sequestered on the property from 2015–2017. Because of the project’s success, we continue to analyze existing land holdings and acquisitions to assess the potential for new carbon sequestration projects.

The ability to quantify, evaluate, and report year-over-year changes in the carbon footprint of a forest can influence an organization’s impact on the environment, leading to increased transparency and more informed business decisions. In 2019, CG and OneFortyOne Plantations Holdings Pty Ltd5 (OFO) completed the first comprehensive carbon footprint report for OFO, a sustainable forest grower and forest products company in Australia and New Zealand. This project not only provided investors with important data but also enabled OFO to further minimize its carbon footprint. The life-cycle analysis of OFO assets estimated the CO2 emissions associated with its tree planting, operations, harvesting, transportation, processing, and product life. The results were very positive, revealing a net carbon savings equivalent to taking nearly 184,500 cars off the road every year, or a reduction of 860,000 net tons of CO2 during the reporting period.

Conclusion

At CG, we believe that incorporating climate change factors into our investment process not only mitigates climate-related risks but also promotes and enhances the natural solutions forests provide. Understanding and measuring the comprehensive carbon stores within forests may lead to business decisions that improve carbon sequestration, a critical factor in addressing climate change.

© 2020 Campbell Global. All rights reserved.

Footnotes

  1. Estimated carbon storage of a 20-inch Douglas-fir using the National Tree Benefit Calculator.

  2. Y. Pan et al., “A Large and Persistent Carbon Sink in the World’s Forests,” Science 333 (19 August 2011): 988–993.

  3. Oregon Forest Resources Institute (OFRI), “Forest to Frame” (2017).

  4. We define our investable universe as the core investment regions in the timberland investment asset class, including North America, Oceania, and Latin America.

  5. CG established OFO in 2012 with a consortium of investors to invest in timberland and related assets in Australasia.

About the Author

Campbell Global